Curt Nichols - Senior Director, Investor Relations John Miller - President and Chief Executive Officer Mark Wolfinger - EVP, CAO and Chief Financial Officer.

Michael Gallo - CL King Alton Stump - Longbow Research Will Slabaugh - Stephens Inc. Tony Brenner - ROTH Capital Partners Mark Smith - Feltl and Company Colin Radke - Wedbush Securities.

Good day and welcome to the Denny's Corporation Third Quarter 2016 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Curt Nichols, Senior Director of Investor Relations. Please go ahead, sir..

Thank you, Tom. Good afternoon, everyone and thank you for joining us for Denny's third quarter 2016 earnings conference call. With me today from management are John Miller, Denny's President and Chief Executive Officer and Mark Wolfinger, Denny's Executive Vice President, Chief Administrative Officer and Chief Financial Officer.

Please refer to our website at investor.dennys.com to find our third quarter earnings press release along with any reconciliation of non-GAAP financial measures mentioned on the call. This call is being webcast and an archive of the webcast will be available on our website later today. John will begin today's call with his introductory comments.

Mark will then provide a recap of our third quarter results, along with brief commentary on our annual guidance for 2016. After that, we will open it up for questions.

Before we begin, let me remind you that in accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, the company knows that certain matters to be discussed by members of management during this call may constitute forward-looking statements.

Management urges caution in considering its current trends and any outlook on earnings provided on this call. Such statements are subject to risks, uncertainties and other factors that may cause the actual performance of Denny's to be materially different from the performance indicated or implied by such statements.

Such risks and factors are set forth in the company's most recent annual report on Form 10-K for the year ended December 30, 2015 and in any subsequent quarterly reports on Form 10-Q. With that, I will now turn the call over to John Miller, Denny's President and Chief Executive Officer..

Thank you, Curt and good afternoon, everybody. Let me start by providing a sense of the energy and enthusiasm generated last week at the annual Denny's Franchisee Association Convention. The growth and progress of this brand is resonating and as we had our largest convention turnout ever.

I've never had so many franchisees express their support for the returns on the quality investments we're making to continually improve our food, our service and our atmosphere. We are thrilled to be working with such a talented and passionate group of franchisees, vendors and employees.

In addition to the excitement from the convention, this collective team and our company's efforts to effectively execute against our strategic initiatives resulted once again in positive same-store sales during the third quarter.

Furthermore in the third quarter our revenue growth coupled with our disciplined focus on cost drove significant improvement in both company and franchise operating margins and led to approximately 6% growth in adjusted EBITDA and approximately 15% growth in adjusted net income per share.

This consistent performance reflects the ongoing momentum generated by the brand revitalization initiatives launched in 2011. Our vision remains to become the world's largest, most admired and loved family local restaurants serving classic American comfort food at a good price around the clock.

We believe our ongoing brand revitalization provides a significant tailwind with less than 50% of our system currently reflecting our successful heritage remodeling program. We remain committed to executing against four key strategic areas to drive our future success.

The first is to deliver a differentiated and relevant brand achieving consistent same-store sales growth supported by profitable gains in guest traffic delivering systems same-store sales growth in 13 of the last 14 quarters demonstrates the success of current strategies as does our consistent strong performance against other full-service and family dining benchmarks.

We will continue to optimize our menus to match our guest needs by responding to their desire for better quality and more credible products. The latest example of our ongoing investment and product quality improvements was the launch of our new pancakes during the quarter.

As a reminder, we completely revamped and improved our pancake recipe by adding fresh buttermilk, real eggs and a hint of vanilla to produce a fluffier, tastier, header buttermilk pancake.

The consumer response has been very positive as 35% of our guests purchased the new pancakes compared to 29% of our guests who were purchasing pancakes before we made the change.

Our latest limited time only menu maintains focus on our improved buttermilk pancakes by featuring seasonal flavors including the pumpkin cream pancake breakfast, the sticky buns pancake breakfast and the salted caramel and banana cream pancake breakfast.

In October we launched our latest core menu which includes the new super blackberry pancakes, a honey jalapeño bacon Sriracha burger and a chilly cheese burger. Since 2014 we have replaced or improved nearly half of our core menu items.

Our continued focus on food innovation and product quality enhancements will be supported by strong brand engagement initiatives, an improving guest experience and enhanced atmosphere. To that point our heritage remodel program continues to perform well.

We completed an additional 62 remodels in the third quarter including six company units bringing the heritage image to approximately 49% of the system. We are also on track to complete over 200 remodels in 2016 ending the year with over 50% of the system on the heritage image.

Remodels will continue to be a significant tailwind for the brand over the next few years as we expect approximately 75% of the system to have a new image by the end of 2018. Our second key strategic area is to consistently operate great restaurants with a primary goal of achieving satisfaction scores in the upper quartile of full-service brands.

Our focus on field training and coaching initiatives is critical to delivering our mission and to be a model franchisor which includes assessment and coaching to run great restaurants. Our Pride Review Program covers all aspects of the guest experience as well as a review of each restaurant facility.

Each store receives a pride score based on the execution of brand standards as well as coaching on specific areas of focus. We have completed nearly 4800 pride reviews and are observing continued steady improvement in the performance scores.

Additionally, our guest satisfaction surveys continue to trend positively and maintain all-time highs since we began measuring overall guest satisfaction in 2011. While we are encouraged by this progress, we recognize the need to continue to invest in strategies to further elevate the Denny's experience.

Our new pancakes launched make the first major initiative supported by our newly structured and systematic launch process which included unprecedented levels of training, ongoing monitoring and coaching efforts.

While generally pleased with the pancake launch, we learn from this exercise and are continually refining our training strategies and execution. We believe our investments in training talent and systems to support our strategies will drive long-term sales growth.

Our third key strategic area is to grow the global franchise expanding Denny's geographic reach of domestic and international locations.

Coming out the Annual Denny's Franchisee Association Convention we believe we can build upon our development pipeline as we look to both expand our global reach and continue to develop in many domestic markets that we believe are ripe for growth. While it will take some time, the inertia and proof-of-concept is resonating.

During the quarter we open an additional 13 restaurants including three international locations resulting in 38 gross openings for the year. With a moderate number of closings we are very encouraged by net unit growth of 18 restaurants year-to-date.

This year we have grown our international portfolio by a net 10 restaurants or over 9% with the opening of two restaurants in Mexico and one in the United Arab Emirates during the third quarter. Additionally, in October we announced the opening of our first restaurant in the Philippines.

With a pipeline of approximately 90 new international restaurants we look forward to gaining further momentum outside of North America. Our strong performance continues to drive interest in the brand attracting new franchisees, building the real estate pipeline and adding new development commitments.

Our fourth key strategic area is to drive profitable growth for all stakeholders with the goal to grow margins and profits. The continued expansion of our highly franchised business will drive consistent profit growth by providing a lower risk profile with upside from operating and meaningful base of high-volume company restaurants.

Our third quarter results continue to demonstrate our ability to leverage revenue growth and a disciplined focus on cost to increase margins and grow key profitability metrics. During the quarter we generated $24.9 million of adjusted EBITDA and $3.7 million of free cash flow after interest, taxes and capital expenditures.

We completed the acquisition of four high-volume units from a Southern California franchisee we had previously announced and added two more units during the quarter. Mark will provide more details on these transactions in a few moments.

For the year we have acquired a total of nine restaurants which have been partially offset by six refranchised restaurants. We remain confident in our strategy to own and operate a base of company restaurants representing approximately 10% of the system.

Our strong free cash flow generation creates significant flexibility to support brand investments including these opportunistic and accretive acquisitions of high-volume franchise restaurants. We expect to generate between $50 million and $52 million of free cash flow this year and remain dedicated to returning cash to our shareholders.

From 2010 through the third quarter of this year we generated over $290 million of free cash flow of which over $230 million or 80% has been invested in share repurchases. We currently have approximately $118 million authorized for ongoing share repurchases.

In closing we remain focused on our brand transformation and building a sustainable foundation to grow around the world. By consistently growing same-store sales and expanding our global reach we will continue to grow the Denny's brand while returning cash to shareholders to our ongoing share repurchase program.

With that, I'll turn the call over to Mark Wolfinger Denny's Chief Financial Officer and Chief Administrative Officer..

Thank you John, and good afternoon everyone. Our third quarter highlights include growing domestic system-wide same-store sales by 1%, adjusted EBITDA by 5.9% to $24.9 million and adjusted net income per share by 15% a $0.13 a share while generating $3.7 million of free cash flow.

During the quarter franchisees opened 13 restaurants including 10 domestic locations and three international locations. In addition, we acquired six franchise restaurants. Our system restaurant count increased by 8 to 1728 restaurants as five franchise restaurants were closed during the third quarter.

Denny's total operating revenue which includes company restaurant sales and franchise and licensee revenue increased by 3.7% to $128.4 million due to higher company restaurant sales and franchise royalties.

Franchise and licensing revenue grew 2.2% to $35.3 million due to a 1% increase in same-store sales, a greater number of franchise restaurants, higher average royalty rate compared to the prior year quarter which was partially offset by lower occupancy revenue.

Franchise operating margin of 70.9% improved by 180 basis points due to higher loyalties and improved occupancy margins. Moving to our company restaurants sales grew by 4.3% to $93.1 million due to an increase in the number company restaurants over the last 12 months and a 1% increase in same-store sales.

Company restaurant operating margin of 17.2% improved by 130 basis points compared to the prior year quarter. This was driven by higher sales, lower incentive compensation, lower product costs and lower occupancy expenses. Total general and administrative expenses of $17.6 million increased by $1.6 million compared to the prior year quarter.

Lower incentive and stock-based compensation expenses were offset by $1.2 million market valuation change in our nonqualified deferred compensation plan liabilities. A corresponding gain on planned assets is reflected in other non-operating income and as a result these valuation changes have no impact on net income.

Adjusted EBITDA increased by $1.4 million or 5.9% to $24.9 million. Depreciation and amortization expense was $200,000 higher at $5.6 million primarily due to capital expenditures associated with company remodels and new and acquired company restaurants.

Interest expense increased by $800,000 to $3.1 million due to a higher revolver balance and a greater number of capital leases compared to the prior year quarter. The revision for income taxes was $5.3 million reflecting an effective income tax rate of 35.2%.

due the use of net operating loss and tax credit carry forwards the company paid approximately $200,000 in cash taxes during the quarter. Adjusted net income per share grew 15% to $0.13 per share.

Free cash flow after capital expenditures, cash taxes and cash interest was $3.7 million compared to $12.4 million in the prior year quarter due primarily to higher comparable expenditures.

As a reminder, prior year third quarter capital expenditures included $700,000 for acquisitions of franchise restaurants while the current year quarter included $8.5 million for acquisitions of franchise restaurants.

Cash capital expenditures of $18.1 million included the remodel of six company restaurants, facilities maintenance and the acquisition of six franchise restaurants.

For the year we've invested $12.4 million to acquire nine total restaurants with average unit volume annual sales of approximately $2.3 million each which is slightly higher than the overall company portfolio average.

Transactions such as these are consistent with our strategy of selectively acquiring high-volume franchise units that fit well with our company operated field infrastructure and are accretive to earnings per share at a 4.5 to 5.5 times multiple.

During the quarter we allocated $11.9 million towards share repurchases excluding the previously announced $50 million accelerated share repurchase program.

At the end of the third quarter basic shares outstanding totaled 74 million shares compared to 81.9 million shares at the end of the prior year quarter for a total reduction of 7.9 million shares. Since beginning our share repurchase program in late 2010, we have repurchased over 33 million shares and reduced our share count by approximately 30%.

We ended the quarter with approximately $118 million of remaining share repurchase authorization. Our quarter end leverage ratio was 2.4 times. At the end of the quarter we had $228.5 million of total debt outstanding including $203 million under our revolving credit facility.

So now, let me take a few minutes to expand on the business outlook section of our earnings release which excludes the impact from our pension plan liquidation. Based on our current expectations for the remainder of the year we are raising certain annual guidance parameters as follows.

We now expect total operating revenue of $506 million to $509 million including franchise and licensing revenue of $139 million $140 million. Due in part to an unprecedented commodity deflation unique to the current year we are raising our company restaurant margin expectation to between 17.5% and 18%.

Likewise we are increasing our franchise operating margin estimate to between 69.5% and 70% primarily due to higher royalty revenue. We are raising our guidance range for general and administrative expenses at this time to between $66 million and $68 million due to higher deferred compensation and payroll and benefits expense estimates.

The midpoint of this revised range for 2016 approximates the total general and administrative expenses recorded from the previous year 2015. Adjusted EBITDA is now estimated to be between $97 million and $99 million while free cash is anticipated to be between $50 million to $52 million after cash capital expenses of $33 million to $35 million.

We are increasing our range for cash capital expenditures by proximally $4 million primarily due to include the acquisition of two additional franchise restaurants.

We will continue to allocate capital towards investments in our brand and company restaurants while also returning capital to our shareholders through our ongoing share repurchase program. That wraps up our guidance commentary and I'll turn the call to the operator to begin the Q&A portion of our call.

Operator?.

Thank you, sir. [Operator Instructions] We will go first to Michael Gallo with CL King,.

Hi good afternoon..

Hi Mike..

Yes, my question John, is a bigger picture question on the remodels, you are at 49% right now.

I think somewhere around this levels usually start to get kind of the brand halo effects of having substantial portion of the system you know reimaged obviously the impact has been greater at lunch and dinner as you certainly improved the atmosphere towards that.

I was wondering now as you start to launch and change dinner items whether you see a stronger or bigger response rate than maybe you would have in the past and if you are at that point we start to sort of see that brand image where people start to say, hey you know, Denny's is a good place to go for dinner and then you have some more legitimacy of being able to really drive product innovation in those dayparts? Thanks..

Thanks Mike. I think it's a great question and I think it's consistent with how we feel about this, but it is only a feeling.

The evidence is really fairly consistent from the beginning of the remodel program, watching those that lapped over and go into the second year and then all those that are in markets that are getting there, their first round it has been consistent, the really sort of the ugliest stores get the strongest response and they all hover around the average by the time they get to a year and second year they continue to build momentum.

So it's good news no matter how you are going to look at it, but we do believe there has to be a value so you reach tipping point where the – though the last user or the, I haven’t been since college kind of crowd, finally goes, maybe we will have to give this another try. So we think it’s a tailwind no matter how you describe it.

Clearly the equities in family dining and the equities in Denny's are around vacation weekend kind of that's where our heaviest dayparts are. That's consistent among our peers to a large degree. There are some exceptions to that.

So there are both marketplace evidence of stronger dinner daypart uses of our category Mike and then there's evidence in our brand that we're still really largely the weekends and on vacation. But we do get the nice lift and really strong guest commentary around the dinner daypart post remodel.

So the ability to build on that with initiatives that appeal specifically to those dayparts we think is in the cards for the future. We don’t want to get ahead of our skis here in how we talk about those initiatives too early, but until you get past the 50% mark it would have been too early to launch.

But as you know, we've been, we changed our tag lines and we've been talking to America's diner now for about five years. A number of the investments we've made in bird category sandwiches, melts, dinner entrée, diner items has stepped up through time.

We've addressed a good portion of the menu, but we're still largely chasing the transactions in and around where we're traditionally seeing the strongest use of our category. A long answer to say, we think it's a tailwind to have momentum in those areas, but it's still a bit early..

Okay great, and then just a followup question for Mark. Mark, the CapEx number is that a net CapEx number given what you expect for the proceeds from re-franchising or I know you have acquisition numbers in there, but do you have refranchising proceeds in there as well? Thanks..

It is the gross number Mike. So, I mean, just a little bit further explanation on that. Obviously we increased the guidance range we talked about that since the acquisitions and I mention a number the sort of in that $12.5 million range on acquisitions.

And then we're estimating probably this year with 25 remodels and probably about $6 million remodels. So when you when you back those out and obviously back out we've also mentioned the fact we did a scrape and rebuild down in South Florida.

So I think as we mentioned before we look at this as growth capital and so when you look at that $33 million to $35 million you know obviously probably more than half of that is really on the growth capital side this year..

Okay, thank you. We'll take our next question from Alton Stump with Longbow Research..

Thank you. Good afternoon everyone..

Hi, Alton..

Great job on the quarter. I noticed that two of your stacks in the third quarter were actually up ever so slightly from 2Q sequentially and there are certainly of casual dining have reported a pretty sharp deceleration.

I just kind of think about what are the biggest one or two drivers of the very solid performance to mid to tough overall casual space? Is it new products? Is it heritage or all of the above or is there anything else that may you didn’t mention so far in your comments might be driving that?.

Yes, Alton, I think those are great questions and obviously we stare at this all the time, where is the momentum and why and then what initiatives can we implement that hit the sweet spot of where the consumer expects us to take our brand. So I think there are some tailwinds that favors.

First of all the geography we certainly are the four states represent about half of our system. They are in the south. We have little to no weather challenges there and generally the economies have recovered a little quicker than the national averages.

We have a full quarter of our system in California which set a fairly strong economy, defiant employment numbers are still over 6% unemployment. Nevertheless the economy is really strong.

So it's an interesting set of pieces of detailed there that's sort of unusual to see and in this high disposable income growing faster than employment recovery, I guess those that are participating are going out to spend money. But we've done really well there with 400 restaurants there in California. So I think geography favors.

It is a little bit of a put that in the plus column for Denny's. I think when it comes to initiatives the building in an everyday value equity in our brand, you don't have the shock price.

You know there's a deal at Denny's all the time or cut a coupon or 2, 4,6, 8 value menus played a role for some 15% of our transactions and that's been as high as 22% transactions over the coming out of the recession over a couple of years ago.

You know that starting late in 2014 we engineered that down a little to create a little less dependency on that into the menu.

We've been able to sustain that through this year maybe with some traffic consequence to cushion it, you know down so far so fast, but the fact that that lasts 5% in the door it might be little more price affordability conscious for that last occasion of the month it may favor us from some strategic efforts over time to build those equities.

I think also in terms of managing a marketing calendar when you have that flexibility inside each marketing quarter the ability to push that lever we planned so many of these things a year in advance, the marketing calendar and so many decisions get made a long time ago, it's hard to work in real time based on how consumer is acting around Olympics or changes in marketing calendars from elections or sensitivities of value wars being played out by QSR, those kinds of things affect all of this in the full service space.

But the ability to sort of call those levels very fluently and conveniently with the 2, 4, 6, 8 equity out there is maybe been a bit good for us. It is hard to really know for sure. Now those are less valuable and super prosperous times.

So at the risk of giving way too long an answer here I'd say one more thing is that we do have, we're nicely in that $9 to $10 per person range, that certainly may favor our carry or fast [indiscernible] in that $9 to $10 range so is family dining.

So that may also put a little bit of a more of a buoyancy to our positioning than other positioned brand..

Got it, great John..

We'd also like to think in a pretty good job, but anyway I apologize for the lines..

And of course, no that's fair color. You know, I have a small followup. With the six acquired franchise stores, six is the biggest number in the quarter it was in my recent memory I think and I bought four a couple of quarters back.

But is there a sign that you guys may be more than just a bit opportunistic when it comes to buying back stores or just a matter of had six pop-ups and made the entry guides to and I wouldn’t read into that thing maybe sort of on an going rate?.

Well, I think, this is Mark. We if you recall in our previous quarter we talked about our six store transaction that we had lined about west and as it turned out some of those stores just from a timing standpoint is up closing in the third quarter, obviously very close to the second quarter, but closed early third quarter.

And so I was going back and looking at the restaurants we've acquired this year and four of those were in California, two in Arizona, one in Florida. So, you can see the geography, how it fits into our company base.

And then we had a couple up North that actually fit into the company markets as well, but I think the answer to your question now we obviously have the right of first refusal any time a franchisee has contracted to sell our store to another franchisee or stores to another franchisee.

But at the same time we also get many cases approached directly by a franchisee that might want to go ahead and monetize their investment in the band. So it's not really a predictable process as much as we want to make sure that strategically it fits into our geography where we have a company base. We have infrastructure already.

I mentioned the averaging of volume of these stores we've acquired is actually above our current company average. They are averaging about $2.3 million those of the acquisition stores. And we are very disappointed as far as the multiple.

I mentioned that sort of 4.5 to 5.5 range, but call it around a 5 multiple and we are quite disappointed sort of sticking in that range as far as the way we run our numbers. So hopefully I've answered your question. You know we again believe this is a long-term strategic opportunity for us.

I will go back to John's comment though we really like this 90-10 model, so 90% franchise, 10% company operated base that we have and that was a little give and take there. We talked about some of the refranchisings we've done too. But we like the blend of this portfolio. It seems to be working pretty well for us right now..

Great, thanks Mark..

We'll take our next question from Will Slabaugh with Stephens Inc..

Yes, thanks guys.

I wanted to go back to your first comment on the pancake quality change, can you remind us what you did with the pricing of your pancakes as you improved the quality and then on the back of that what the customer response from that improved quality tells you in terms of the opportunity around the rest of your menu to continue quality, adding transparency on the ingredients side?.

Well, those are great questions Will. He first are, it was just pennies, so I don't think you could, there's really nominal, it was just enough to sort of break even with some of the ingredient changes.

I'm not sure it would be all that detectable given that overall menu prices over the last couple of years have been in that 2.5 range or two years in a row from higher meat prices or avian flu and obviously we're in a deflationary environment now, but it would have been small compared to the overall other menu adjustments.

Yes, I think that the customer of today and we assign this to millennials, but I think it's all customers and so to come age we want food that our body knows what to do with, we want real food. So anytime you have a dehydrated or derivative of you know we're sort of moving to make it real.

So butter milk and eggs versus egg parts or dehydrated milk fat and in those, those are just better products. They are fluffier. They taste better. They are maybe a little more complicated once you get through the training for the cook but once you get it down everybody has got a lot more pride in serving those products.

So I think we went to 100% real big claim. There are a number of things we've done to the menu fresh specials versus frozen, fresh avocados versus frozen that we had a few years ago. So quarter by quarter menu print by menu print we've been making these vast improvements.

Now we do think there's a limit where the customer says affordability matters to me too on a relative basis that the grocery start to look attractive then restaurants can lose some share at least for a season until lifestyles and salaries readjust. So we think it is important to keep that balance that Denny's is not trying to become the Four Seasons.

We're everyday affordable place, unpretentious, comes you are. We understand what consumers expect from family dining. So pricing and values are really important, but modest bumps in price to have real food I think consumers really appreciate..

Great, thank you..

We'll take our next question from Tony Brenner with ROTH Capital Partners..

Thank you.

With a 1% [indiscernible] increase it seems likely that customer traffic was down about 1.5 percentage, is that correct?.

That's right Tony. So the whole system it was negative traffic for the quarter but company stores were down 0.4 and franchisees just a little more than 1% negative. So in that, yes again the company stores have a bigger percent remodeled and so over time that will reverse itself. So, that was on the quarter and then on the year-to-date a similar story.

So the full year you are looking at about 2.5-ish to 2.6 pricing you are looking at about flat mix change you're looking at. You know what our sales guidance range is and the difference is traffic. So it is a little bit of a correction on our value menu which has a little bit of a traffic consequence for the year.

But I think we are pleased with sticking with this strategy of being a little less value menu dependent at the moment and we can always push that if we need to..

It would seem that at least in California where the minimum wage goes up again which I said it doesn’t go up this year is it right and January?.

It does 8% [ph]..

Okay..

It goes up and yes 17 again by $0.50 Tony..

Okay.

Then presumably you'll be raising prices again to offset that and at the same time inducing through marketing customers to focus on the value menu 2, 4, 6, 8, to a greater extent and I'm just wondering hope, putting all those components together what the effect on margins would be as your quest come up is try to offset that as best you can through pricing and at the same time you are inducing his pressure Pricing and at the same time inducing consumers to trade down a bit in the mix?.

Yes, it's been interesting. California has been positive in traffic. I think we had with a negative traffic for the first time in a while in Q2 and went right back to positive traffic in California in Q3. So it has been a real positive story for us since buyback we've had more aggressive pricing out there.

The – it is sort of the cat gets the mouse and the mouse gets away, it's the price goes up and we changed it with a little bit of price increase and then we get back ahead of it and then it goes up again we chase it. You can't get it all in one price increase up there.

So, margins were all compressed on the labor line but food cost has been real favorable. When you marry it all together our California stores are doing quite well and there will be a $0.50 impact again in January the following January it will be a dollar a year until it hits $15 and then it will be pegged to inflation I think after that.

So California won't be the only state. You'll see other states follow I presume and there will be some states that address tip credit in a different way than it is addressed today. So I think what's interesting about this is it all happens to everybody at once.

And so in California if you were to say we would automatically because of higher cost push people toward a value menu that may not be necessarily so.

It could be that people are benefiting from making a dollar more an hour and you take you know price increase in the menu, but the disposable income is rising and people are spending and eating out instead of brown bagging it.

So it could be that on a relative basis we actually have a more favorable menu pricing there even though it is going up faster than in other states compared to some competitors. So you just have to read it in real time.

I think the important part of the question though especially if you are looking ahead to trying to model is that for the for the 59 company restaurants that operate there it is on a year-to-date basis about 200 basis point headwind I think to the company P&L on the labor line offset by call it 1.5-ish in food cost benefit from commodity deflation.

So it doesn't take a ton of price increasing at 2% price increase and you're still ahead with margins expanding and the consumer has been willing to take that 2 to 2.5 price increase up there. So there is wage inflation. There is margin deflation and overall we still have expanding margins both year-to-date and guidance for the full year..

Okay.

Both Christmas and New Year's fall on a Sunday I guess New Year's falls on sort of first quarter for you this year, but will that be headwind?.

So yes, there is fourth quarter slight holiday adjustments, slight negative holiday adjustment even that will still be our easiest comparison quarter for the year and because of the day Christmas falls on. And I'm trying to, we actually calculated that, give me a second, I'll give you precisely what that is.

I might have to come back to you in a minute on that..

[Operator Instructions] We will go next to Mark Smith with Mark Smith with Feltl and Company..

Hi guys..

Hi Mark..

First, can you guys give us an insight into how the comps trended sequentially during the quarter?.

Yes, July was toughest. We had a little bit of a holiday slip there with late July fourth week and so it started out and then it improved all the way through the end of the third period of the quarter, progressively improved..

And then just really a big picture question, just how do you feel about the consumer and what are you guys seeing from the consumer right now.

You know do you feel like maybe you get a bump as we get through some of the election noise or do you feel like the consumers I mean just anything insight you can give would be great?.

Well that overall employment is improving and real income is improving. You know, nonfarm payroll is usually fairly well correlated to dine outs especially full service. So I'd say that on paper it looks like we should find the bottom and start to have an improving environment.

Customer sentiment also plays a pretty big role in full-service dining and particularly in the casual segment. And so I think you, it would be hard not to associate some of the challenges this year with sort of the nasty politics we have seen.

I think there is a couple of other things that make this year tough by comparison as we've talked about the value wars that were launched by sort of all day breakfast Q4 McDonald's rollout, the Super Bird some sandwich pricing wars that sort of spilled over and carried through the year.

So I think that has played a role in dine out having some tough comparisons and then I think midyear also housing starts improvement with 27 projected be it about a million 3 housing starts the best in the last 10 years that's good news that puts people back to work and these read out. So I'd say overall the environment was pretty positive on paper.

But again midyear, last year 2015 you had big sort of like sky rocket car sales and then that settled down a little bit and then you have the housing starts and durable goods jumps up quite a bit and then midyear this year not big-box, but online shopping had I think like 20% plus increases July and July the best in like 20 years.

So I think some of that money came out of dining out and my sense of it is, as all that settles down we get back to a pretty good environment. The other thing that's going on I think is the Texas, Florida dance.

So many national chains have big footprints in both Texas and Florida and those have been a little bit diminished and Texas is down Florida tourism goes down and Texas has been softer for us, we're about I think it is a 190 basis points behind the system number. It was down I think 29 in the quarter in Texas improving still soft.

So I think that would be true for me if our competitors as well and might since if it is all those things continue to find a bottom and recover, if they haven't found the bottom sometimes..

And then any hurricane impact to call out?.

Yes, we are so nationally well distributed. We had – I think 112 stores closed but for many of those less than 24 hours. So we wouldn't call any attention to it as being a material factor in the quarter. I do have Tony's answer. It looks like November benefit by way of holiday shift by about 0.3 and December down 1.2.

but again the guidance is the best number to follow. It should be a good quarter..

And we'll take our next question from Nick Setyan with Wedbush Securities..

Hey guys, this is Colin Radke on for Nick. My question was just on the unit development and specifically the franchise development domestically.

John, you kind of touched on at the beginning your prepared remarks in terms of some optimism amongst the franchise community and at the same time I think you also mentioned some inertia, but you also took the unit development guidance up for this year today.

So I was wondering if you could sort of talk about where franchisees stand, what their appetite is for unit development and if we could start to see a tick up from here next year and going forward?.

First of all I would say my hats off and congratulations and commendations go to our franchise community that is developing in the full-service environment. They are bullish on our brand and we're proud of them, we're proud of that.

We have been one of the top growers in the full-service segment for a number of years in a row, but we've been missing the number we had hoped to achieve. So this is hard bought curve to get to this 50 unit growth numbers a year. We haven't quite gotten there, but it is at the high end of our guidance finally in the 45 to 50.

So that's a proud moment and milestone for us. And so that’s really sort of what's behind the comment. It is momentum. We've been working very hard to the day that we could say that and put it in the guidance number. It is at the high end of our guidance range but nevertheless achievable.

And then the net number is also solid this year compared to the last several years. So that's momentum for us, but momentum or not it's still among those stronger growing full service brands..

Okay and if that's the sort of development rate that we should expect going forward, nothing that's changed significantly there?.

That's right, yes. So though we don't guide long term one of things we've consistently said is that our goal is to get to that 50 gross number and so obviously, you know I don’t want to get into 2017 guidance but the fact that we can get there this year you'd expect that there'd be some consistency with that goal..

Okay and then where are we running in terms of pricing following the October menu update, what's that look like for Q4 and into 2017?.

Well, for year-to-date we're at about 21 company 26 franchise pricing Q3 that's Q3 over Q3. The full year should look pretty similar to that number. And if - I'm checking if I need to revise that I'll get back to you in a moment, but I think that's pretty dead on..

Okay, then on just the last one for me, I know you don't want to get too specific in terms of 2017, but anything to – any kind of initial outlook in terms of the commodity outlook, are you expecting another year of deflation or any kind of general color there?.

It's Mark. On the commodity side it has been an interesting year certainly especially the second half of this year. So for 2016 we're talking about a deflation number for the entire year of somewhere between 4%and 5%. We're locked into about 70% and when I say locked in that's pretty much maxed out as to what we can lock into.

And again that deflation number is even bigger in the second half. So in the first half I think we talked about in Q1 and Q2 how much backend loaded deflation was going to occur and if you recall last year, we had the egg crisis or egg from last year and that really hit us in the second half of 2015.

In 2015 I think overall our inflation number was sort of in that 2 range call it low 2% type of range for commodity inflation.

And we really haven't talked about 2017 as of yet and I really don't want to go there as of yet because you'll hear more from us obviously on that when we do our annual guidance in mid-February and so I'll just leave 2017 out there without a comment at this point..

All right, thank you very much..

Thank you..

And Mr. Nichols, there appears to be no more questions in the queue at this time..

Okay, thank you Tom. I'd like to thank each one of you for joining us on today's call. We look forward to our next earnings conference call in February to discuss our fourth quarter 2016 result. Thank you all and have a great evening..

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation..